<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
Commission File Number 0-21298
ST. FRANCIS CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1747461
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13400 BISHOPS LANE, SUITE 350
BROOKFIELD, WISCONSIN 53005-6203
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(414) 744-8600
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes x No
--- ---
(2) Yes x No
--- ---
The number of shares outstanding of the issuer's common stock, $.01 par
value per share, was 5,302,977 at July 31, 1997.
Page 1 of 29 pages
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ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
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<S> <C> <C>
ITEM 1. Financial Statements:
Consolidated Statements of Financial Condition ................. 3
Consolidated Statements of Income .............................. 4
Consolidated Statements of Shareholders' Equity ................ 5
Consolidated Statements of Cash Flows .......................... 6
Notes to Consolidated Financial Statements ..................... 8
ITEM 2. Management's Discussion and Analysis ........................... 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ..... N/A
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings .............................................. 28
ITEM 2. Changes In Securities .......................................... 28
ITEM 3. Defaults Upon Senior Securities ................................ 28
ITEM 4. Submission of Matters to a Vote of Security Holders ............ 28
ITEM 5. Other Information .............................................. 28
ITEM 6. Exhibits and Reports on Form 8-K ............................... 28
SIGNATURES .............................................................. 29
- ----------
</TABLE>
2
<PAGE> 3
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, September 30,
1997 1996
---------- -------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks........................... $ 33,105 $ 17,604
Federal funds sold and overnight deposits......... 11,900 4,855
---------- ----------
Cash and cash equivalents......................... 45,005 22,459
---------- ----------
Trading account securities, at market............. - -
Assets available for sale, at market:
Debt and equity securities...................... 71,835 60,001
Mortgage-backed and related securities.......... 617,925 519,766
Mortgage loans held for sale, at lower of
cost or market.................................. 17,080 20,582
Securities held to maturity:
Debt and equity securities (market values of
$4,757 and $6,331, respectively)................ 4,663 6,215
Mortgage-backed and related securities (market
values of $65,868 and $65,316, respectively).... 67,341 68,392
Loans receivable, net............................. 697,269 610,699
Federal Home Loan Bank stock, at cost............. 21,643 19,063
Accrued interest receivable....................... 8,919 8,067
Foreclosed properties............................. 188 80
Real estate held for investment................... 44,524 36,865
Premises and equipment, net....................... 23,368 16,432
Other assets...................................... 25,211 15,495
---------- ----------
Total assets...................................... $1,644,971 $1,404,116
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits.......................................... $1,054,604 $ 877,684
Short term borrowings............................. 94,880 18,509
Long term borrowings.............................. 346,917 356,525
Advances from borrowers for taxes and insurance... 6,514 11,092
Accrued interest payable and other liabilities.... 12,942 15,127
---------- ----------
Total liabilities................................. 1,515,857 1,278,937
---------- ----------
Commitments and contingencies..................... - -
Shareholders' equity:
Preferred stock $.01 par value: Authorized,
6,000,000 shares;
None issued..................................... - -
Common stock $.01 par value: Authorized
12,000,000 shares;
Issued, 7,289,620 shares;
Outstanding, 5,307,977 and 5,475,509 shares,
respectively.................................... 73 73
Additional paid-in-capital........................ 73,342 72,243
Unrealized loss on securities available for sale,
net of tax...................................... 366 (1,765)
Unearned ESOP compensation........................ (3,195) (3,488)
Treasury stock at cost (1,981,643 and 1,814,111
shares, respectively)........................... (41,020) (35,529)
Retained earnings, substantially restricted....... 99,548 93,645
---------- ----------
Total shareholders' equity........................ 129,682 125,179
---------- ----------
Total liabilities and shareholders' equity........ $1,644,971 $1,404,116
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE> 4
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans................................................... $41,945 $34,796 $15,043 $11,956
Mortgage-backed and related securities.................. 31,592 29,036 11,444 10,001
Debt and equity securities.............................. 3,226 2,346 1,213 779
Federal funds sold and overnight deposits............... 872 794 228 230
Federal Home Loan Bank stock............................ 1,024 905 329 287
Trading account securities.............................. 170 3 47 -
------- ------- ------- -------
Total interest and dividend income........................ 78,829 67,880 28,304 23,253
------- ------- ------- -------
INTEREST EXPENSE:
Deposits................................................ 34,149 27,387 12,400 9,610
Advances and other borrowings........................... 16,105 13,947 5,658 4,638
------- ------- ------- -------
Total interest expense.................................... 50,254 41,334 18,058 14,248
------- ------- ------- -------
Net interest income before provision for loan losses...... 28,575 26,546 10,246 9,005
Provision for loan losses................................. 501 222 129 78
------- ------- ------- -------
Net interest income....................................... 28,074 26,324 10,117 8,927
------- ------- ------- -------
OTHER OPERATING INCOME (EXPENSE), NET:
Loan servicing and loan related fees.................... 1,421 936 452 313
Depository fees and service charges..................... 1,397 1,041 551 356
Trading securities gains and commitment fees, net....... 607 109 100 -
Impairment loss on mortgage-backed securities (2,050) - (2,050) -
Gain on debt and equity and mortgage-backed
and related securities, net. 1,038 3,276 411 (1)
Gain on sales of mortgage loans held for sale, net...... 834 815 464 157
Insurance and annuity commissions....................... 299 205 81 40
Gain (loss) on foreclosed properties.................... (1) 867 6 (5)
Income from affordable housing.......................... 2,454 1,331 964 412
Other income............................................ 447 320 160 -
------- ------- ------- -------
Total other operating income, net......................... 6,446 8,900 1,139 1,272
------- ------- ------- -------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and employee benefits...................... 11,324 9,843 4,005 3,490
Office building, including depreciation................. 1,876 1,513 695 508
Furniture and equipment, including depreciation......... 1,704 1,329 599 476
Federal deposit insurance premiums...................... 601 1,063 138 374
Real estate held for investment......................... 2,870 1,538 1,039 458
Other general and administrative expenses............... 6,214 4,775 2,364 1,666
------- ------- ------- -------
Total general and administrative expenses................. 24,589 20,061 8,840 6,972
------- ------- ------- -------
Income before income tax expense.......................... 9,931 15,163 2,416 3,227
Income tax expense........................................ 1,322 4,268 (60) 683
------- ------- ------- -------
Net income................................................ $ 8,609 $10,895 $ 2,476 $ 2,544
======= ======= ======= =======
Earnings per share........................................ $ 1.61 $ 1.86 $ 0.46 $ 0.45
======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE> 5
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Shares of Losses on
Common Additional Securities Unearned
Stock Common Paid-In Available ESOP
Outstanding Stock Capital For Sale Compensation
---------------------------------------------------------------
(In thousands, except shares of common stock outstanding)
<S> <C> <C> <C> <C> <C>
Nine months ended June 30, 1996
- -------------------------------
Balance at September 30, 1995.......... 6,078,799 $ 73 $71,819 $ 2,332 $ (3,996)
Net income............................. - - - - -
Cash dividend - $0.30 per share........ - - - - -
Purchase of treasury stock............. (419,890) - - - -
Exercise of stock options.............. - - - - -
Amortization of unearned compensation.. - - 323 - 480
Unrealized loss on securities available
for sale, net of tax................. - - - (4,279) -
--------- ----- ------- -------- --------
Balance at June 30, 1996............... 5,658,909 $ 73 $72,142 $ (1,947) $ (3,516)
========= ===== ======= ======== ========
Nine months ended June 30, 1997
- -------------------------------
Balance at September 30, 1996.......... 5,475,509 $ 73 $72,243 $ (1,765) $ (3,488)
Net income............................. - - - - -
Cash dividend - $0.36 per share........ - - - - -
Purchase of treasury stock............. (255,622) - - - -
Exercise of stock options.............. 88,090 - 380 - -
Amortization of unearned compensation.. - - 719 - 293
Unrealized gain on securities available
for sale, net of tax................. - - - 2,131 -
--------- ----- ------- -------- --------
Balance at June 30, 1997............... 5,307,977 $ 73 $73,342 $ 366 $ (3,195)
========= ===== ======= ======== ========
<CAPTION>
Unearned
Restricted Treasury Retained
Stock Stock Earnings Total
---------------------------------------------------------
(In thousands, except shares of common stock outstanding)
<S> <C> <C> <C> <C>
Nine months ended June 30, 1996
- -------------------------------
Balance at September 30, 1995.......... $ (701) $(20,142) $85,843 $135,228
Net income............................. - - 10,895 10,895
Cash dividend - $0.30 per share........ - - (1,671) (1,671)
Purchase of treasury stock............. - (10,603) - (10,603)
Exercise of stock options.............. - - (418) (418)
Amortization of unearned compensation.. 701 - - 1,504
Unrealized loss on securities available
for sale, net of tax................. - - - (4,279)
------ -------- ------- --------
Balance at June 30, 1996............... $ - $(30,745) $94,649 $130,656
====== ======== ======= ========
Nine months ended June 30, 1997
- -------------------------------
Balance at September 30, 1996.......... $ - $(35,529) $93,645 $125,179
Net income............................. - - 8,609 8,609
Cash dividend - $0.36 per share........ - - (1,809) (1,809)
Purchase of treasury stock............. - (7,270) - (7,270)
Exercise of stock options.............. - 1,779 (897) 1,262
Amortization of unearned compensation.. - - - 1,012
Unrealized gain on securities available
for sale, net of tax................. - - - 2,131
------ -------- ------- --------
Balance at June 30, 1997............... $ - $(41,020) $99,548 $129,114
====== ======== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE> 6
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------------------
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................... $ 8,609 $ 10,895
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for loan losses.............................. 501 222
Depreciation, accretion and amortization............... 2,308 1,693
Deferred income taxes.................................. 1,062 (738)
Gain on debt and equity, mortgage-backed and related
securities and trading account securities, net....... (1,645) (3,385)
Gains on the sales of mortgage loans held for sale, net (834) (815)
Stock-based compensation expense....................... 1,012 1,504
Impairment loss on mortgage-backed securities 2,050
(Increase) decrease in loans held for sale............. (3,502) 4,517
Decrease in trading account securities, net............ - 3,000
Other, net............................................. 8,746 1,827
--------- ---------
Total adjustments........................................ 9,698 7,825
--------- ---------
Net cash provided by operating activities................ 18,307 18,720
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of debt and equity
securities........................................... 2,011 25,520
Purchases of debt and equity securities................ (459) (18,535)
Purchases of mortgage-backed and related securities.... - (1,000)
Principal repayments on mortgage-backed and related
securities........................................... 1,051 5,464
Purchases of mortgage-backed securities available
for sale............................................. (262,720) (284,991)
Proceeds from sales of mortgage-backed securities
available for sale................................... 105,549 159,929
Principal repayments on mortgage-backed securities
available for sale................................... 57,949 45,543
Purchase of debt and equity securities available
for sale............................................. (42,199) (52,794)
Proceeds from maturities of debt and equity
securities available for sale........................ - 9,528
Proceeds from sales of debt and equity securities
available for sale................................... 24,899 31,680
Principal repayments on debt and equity securities
available for sale................................... 13,112 -
Net cash used for acquisitions......................... (7,118) -
Purchases of Federal Home Loan Bank stock.............. (2,580) (1,034)
Redemption of Federal Home Loan Bank stock............. - 436
Purchase of loans...................................... (13,687) (36,585)
(Increase) decrease in loans, net of loans held
for sale............................................. (10,324) (26,222)
Increase in real estate held for investment............ (7,659) (6,740)
Proceeds from sale of foreclosed properties............ - 6,767
Purchases of premises and equipment, net............... (8,578) (6,143)
--------- ---------
Net cash used in investing activities.................... (150,753) (149,177)
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
6
<PAGE> 7
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flow, cont.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------------------
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits............................... 109,118 138,547
Proceeds from advances and other borrowings............ 143,720 36,001
Repayments on advances and other borrowings............ (85,451) (25,807)
Decrease in advances from borrowers for taxes
and insurance........................................ (4,578) (3,577)
Dividends paid......................................... (1,809) (1,671)
Stock option transactions.............................. 1,262 (418)
Purchase of treasury stock............................. (7,270) (10,603)
--------- ---------
Net cash provided by financing activities................ 154,992 132,472
--------- ---------
Increase in cash and cash equivalents.................... 22,546 2,015
Cash and cash equivalents:
Beginning of period.................................. 22,459 20,780
--------- ---------
End of period........................................ $ 45,005 $ 22,795
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................. $ 50,706 $ 42,945
Income taxes......................................... 127 4,473
Supplemental schedule of noncash investing and financing activities:
The following summarizes significant noncash investing
and financing activities:
Mortgage loans secured as mortgage-backed
securities......................................... $ 44,945 -
Reclassification of assets held to maturity to
assets available for sale.......................... - $ 117,300
Transfer of mortgage loans to mortgage loans held
for sale........................................... 28,433 10,757
Acquisitions:
Assets acquired.................................... 93,044 -
Cash paid for purchase of stock.................... $ (25,283) -
Cash acquired...................................... 18,165 -
--------- ---------
Net cash used for acquisitions..................... $ (7,118) -
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
7
<PAGE> 8
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) Principles of Consolidation
The consolidated financial statements include the accounts and balances of
St. Francis Capital Corporation (the "Company"), St. Francis Bank, F.S.B.
(the "Bank"), Bank Wisconsin and the Bank's and Bank Wisconsin's
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(2) Basis of Presentation
The accompanying interim consolidated financial statements are unaudited
and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations or cash flows
in accordance with generally accepted accounting principles. However, in
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. Operating results for the three-month and
nine-month periods ended June 30, 1997 are not necessarily indicative of
the results which may be expected for the entire year ending September 30,
1997. The September 30, 1996 Consolidated Statement of Financial
Condition presented with the interim financial statements was audited and
the auditors' report thereon was unqualified.
Certain previously reported balances have been reclassified to conform
with the 1997 presentation.
(3) Commitments and Contingencies
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit
and involve, to varying degrees, elements of credit and interest rate risk
in excess of the amounts recognized in the consolidated financial
statements. The contract amounts of these instruments reflect the extent
of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for the commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for instruments that
are reflected in the consolidated financial statements.
8
<PAGE> 9
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The contractual or notional amounts of off-balance sheet financial instruments
are as follows:
<TABLE>
<CAPTION>
Contractual or Notional Amount(s)
June 30, September 30,
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Commitments to extend credit:
Fixed-rate loans........................... $ 14,728 $ 18,487
Variable-rate loans........................ 19,886 18,722
Guarantees under IRB issue................... 11,220 4,200
Interest rate swap agreements (notional
amount).................................... 113,000 55,000
Interest rate corridors (notional amount).... 30,000 -
Commitments to:
Purchase mortgage-backed securities........ 4,000 12,800
Sell mortgage-backed securities............ 4,880 1,100
Unused and open-ended lines of credit:
Consumer................................... 119,951 107,052
Commercial................................. 50,303 14,935
Open option contracts written:
Short-put options.......................... 4,000 4,000
Short-call options......................... 7,000 4,000
Commitments to fund equity investments....... 4,670 13,796
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates of 45 days or less or other
termination clauses and may require a fee. Fixed rate loan commitments as of
June 30, 1997 have interest rates ranging from 7.80% to 9.00%. Because some
commitments expire without being drawn upon, the total commitment amounts do not
necessarily represent cash requirements. The Company evaluates the
creditworthiness of each customer on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension of credit
is based on management's credit evaluation of the counterparty. The Company
generally extends credit on a secured basis. Collateral obtained consists
primarily of one- to four-family residences and other residential and commercial
real estate.
The Company has entered into agreements whereby, for an initial and annual
fee, it will guarantee payment for an industrial revenue bond issue ("IRB").
The IRB was issued by a municipality to finance real estate owned by a third
party. Potential losses on the guarantees are the notional amount of the
guarantees less the value of the real estate collateral. At June 30, 1997,
appraised values of the real estate collateral exceed the amount of the
guarantees.
Interest rate swap agreements generally involve the exchange of fixed and
variable rate interest rate payments without the exchange of the underlying
notional amount on which the interest rate payments are calculated. The fixed
pay-floating receive agreements were entered into as hedges of the interest
rates on the Federal Home Loan Bank (the "FHLB") advances. The fixed
receive-floating pay agreements were entered into as hedges of the interest
rates on fixed rate brokered certificates. Interest receivable or payable on
interest rate swaps is recognized using the accrual method. The agreements at
June 30, 1997 consist of the following:
9
<PAGE> 10
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
Notional
Amount Maturity Fixed Variable
(000s) Type Date Rate Rate
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$10,000 Fixed Pay-Floating Receive 1998 5.04% 5.78%
10,000 Fixed Pay-Floating Receive 1998 4.93% 5.81%
15,000 Fixed Pay-Floating Receive 1998 5.25% 5.81%
10,000 Fixed Pay-Floating Receive 1998 5.23% 5.81%
10,000 Fixed Pay-Floating Receive 1998 5.43% 5.81%
15,000 Fixed Receive-Floating Pay 2002 7.00% 5.70%
8,000 Fixed Receive-Floating Pay 2002 7.00% 5.16%
20,000 Fixed Receive-Floating Pay 2004 7.00% 5.64%
15,000 Fixed Receive-Floating Pay 2007 7.15% 5.63%
</TABLE>
The fair value of interest rate swaps, which is based on the present value
of the swap using dealer quotes, represent the estimated amount the Company
would receive or pay to terminate the agreements taking into account current
interest rates and market volatility. The interest rate swaps are off-balance
sheet items; therefore, at June 30, 1997, the gross unrealized gains and losses
of $1,168,000 and $170,000, respectively, equals the fair value of the interest
rate swaps of $998,000.
Interest rate corridors are used to help protect the Company's net interest
margin in various interest rate environments. These instruments do not
qualify as hedges and are accounted for in the trading portfolio; and therefore,
are valued at fair value.
Commitments to purchase and sell mortgage-backed securities are contracts
which represent notional amounts to purchase and sell mortgage-backed securities
at a future date and specified price. Such commitments generally have fixed
settlement dates.
The unused and open consumer lines of credit are conditional commitments
issued by the Company for extensions of credit such as home equity, auto, credit
card, or other similar consumer type financing. Furthermore, the unused and
open commercial lines of credit are also conditional commitments issued by the
Company for extensions of credit such as working capital, agricultural
production, equipment or other similar commercial type financing. The credit
risk involved in extending lines of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held for these
commitments may include, but may not be limited to, real estate, investment
securities, equipment, accounts receivable, inventory, and Company deposits.
The open option contracts written represent the notional amounts to buy
(short-put options) or sell (short-call options) mortgage-backed securities at a
future date and specified price. The Company receives a premium/fee for option
contracts written which gives the purchaser the right, but not the obligation to
buy or sell mortgage-backed securities within a specified time period for a
contracted price. The Company has been primarily utilizing these items to
manage the interest rate and market value risk relating to mortgage-backed
securities that result from the MBS loan swap program and mortgage loan
pipeline.
The commitments to fund equity investments represent amounts St. Francis
Equity Properties ("SFEP"), a subsidiary of the Bank, is committed to invest in
low-income housing projects, which would qualify for tax credits under Section
42 of the Internal Revenue Code (the "Code"). The Code provides a per state
volume cap on the amounts of low-income housing tax credits ("LIHTCs") that may
be taken with respect to low-income housing projects in each state. In order to
claim a LIHTC, a credit allocation must
10
<PAGE> 11
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, continued
be received from the appropriate state or local housing development
authority. SFEP is currently a limited partner in 24 projects. At June 30,
1997, SFEP's equity investments in such projects totaled $19.5 million. SFEP
has committed to additional equity investments totaling $4.7 million in two
projects it currently has an investment in and in one additional future project
within the state of Wisconsin. Additionally, the Bank has provided financing or
committed to provide financing to 24 of these projects. At June 30, 1997, the
Bank had loans outstanding to such projects of $22.3 million. The primary
benefit to the Company on these projects is in the form of tax credits.
(4) Securities
The Company's securities available for sale and held to maturity at June 30,
1997 were as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
--------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
DEBT AND EQUITY SECURITIES:
U.S. Treasury obligations and
obligations of U.S. Government
Agencies............................. $ 27,092 $ 94 $ 85 $ 27,101
State and municipal obligations........ 1,429 2 37 1,394
Corporate notes and bonds.............. 5,526 9 7 5,528
Asset-backed securities................ 18,236 - 106 18,130
Marketable equity securities........... 19,682 - - 19,682
-------- ------ ------- --------
TOTAL DEBT AND EQUITY SECURITIES....... $ 71,965 $ 105 $ 235 $ 71,835
======== ====== ======= ========
MORTGAGE-BACKED & RELATED SECURITIES:
Participation certificates:
FHLMC................................ $ 4,193 $ 14 $ 28 $ 4,179
FNMA................................. 13,078 55 - 13,133
GNMA................................. 3,790 309 - 4,099
Private issue........................ 232,366 1,163 1,030 232,499
REMICs:
FHLMC................................ 149,216 534 230 149,520
FNMA................................. 64,107 558 86 64,579
GNMA................................. 4,697 23 - 4,720
Private issue........................ 145,838 841 1,536 145,143
CMO residual........................... 53 - - 53
-------- ------ ------- --------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES........................... $617,338 $3,497 $ 2,910 $617,925
======== ====== ======= ========
</TABLE>
11
<PAGE> 12
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY
--------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
DEBT AND EQUITY SECURITIES:
U. S. Treasury obligations and
obligations of U.S. Government
Agencies............................. $ 3,027 $ 56 $ - $ 3,083
State and municipal obligations........ 1,636 38 - 1,674
-------- ------ ------- -------
TOTAL DEBT AND EQUITY SECURITIES....... $ 4,663 $ 94 $ - $ 4,757
======== ====== ======= =======
MORTGAGE-BACKED & RELATED SECURITIES:
REMICs:
FHLMC................................ $ 2,234 $ 31 $ - $ 2,265
FNMA................................. 2,257 16 25 2,248
Private issue........................ 62,850 - 1,495 61,355
-------- ------ ------- -------
TOTAL MORTGAGE-BACKED AND RELATED
SECURITIES........................... $ 67,341 $ 47 $ 1,520 $65,868
======== ====== ======= =======
</TABLE>
During the nine months ended June 30, 1997 and 1996, gross proceeds from
the sale of securities available for sale totaled approximately $130.4 million
and $191.6 million, respectively. The gross realized gains on such sales
totaled approximately $1.1 million and $3.4 million for the nine months ended
June 30, 1997 and 1996, respectively. The gross realized losses on such sales
totaled approximately $37,000 and $91,000 for the nine months ended June 30,
1997 and 1996, respectively. During the three months ended June 30, 1997 and
1996, gross proceeds from the sale of securities available for sale totaled
approximately $54.1 million and $66.3 million, respectively. The gross realized
gains on such sales totaled approximately $414,000 and $66,000 for the three
months ended June 30, 1997 and 1996, respectively. The gross realized losses on
such sales totaled approximately $3,000 and $67,000 for the three months ended
June 30, 1997 and 1996, respectively. An impairment loss of $2,050,000 was
recognized during the three months ended June 30, 1997 relating to certain
private issue mortgage-backed securities.
12
<PAGE> 13
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, continued
(5) Loans
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
June 30, September 30,
(In thousands) 1997 1996
-------------------------------------------------------------------------
<S> <C> <C>
First mortgage - one- to four-family.......... $259,431 $270,614
First mortgage - residential construction..... 42,237 32,249
First mortgage - multi-family................. 106,956 103,262
Commercial real estate........................ 73,212 46,391
Home equity................................... 112,083 90,579
Commercial and agriculture.................... 54,830 25,177
Consumer secured by real estate............... 66,898 66,346
Interim financing and consumer loans.......... 29,843 21,890
Education..................................... 10,295 12,142
-------- --------
Total gross loans........................... 755,785 668,650
-------- --------
Less:
Loans in process............................ 32,829 29,631
Unearned insurance premiums................. 521 647
Deferred loan and guarantee fees............ 1,310 851
Purchased loan discount..................... 998 1,023
Allowance for loan losses................... 5,778 5,217
-------- --------
Total deductions............................ 41,436 37,369
-------- --------
Total loans receivable........................ 714,349 631,281
Less: First mortgage loans held for sale...... 17,080 20,582
-------- --------
Loans receivable, net......................... $697,269 $610,699
======== ========
</TABLE>
(6) Allowance For Loan Losses
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
-----------------------------------------------
1997 1996 1997 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
Beginning Balance.............. $ 5,217 $4,076 $6,122 $4,204
Charge-offs:
Real estate - mortgage....... (15) - (15) -
Commercial real estate....... - - - -
Commercial loans............. - - - -
Home equity loans............ - (6) - (6)
Consumer..................... (1,680) (61) (461) (39)
------- ------- ------ ------
(1,695) (67) (476) (45)
------- ------- ------ ------
Recoveries:
Real estate - mortgage....... - - - -
Commercial real estate....... - - - -
Commercial loans............. - - - -
Home equity loans............ - 21 - 19
Consumer..................... 77 7 3 3
------- ------- ------ ------
77 28 3 22
------- ------- ------ ------
Net charge-offs................ (1,618) (39) (473) (23)
------- ------- ------ ------
Acquired bank's allowance...... 1,678 - - -
Provision...................... 501 222 129 78
------- ------- ------ ------
Ending balance................. $ 5,778 $ 4,259 $5,778 $4,259
======= ======= ====== ======
</TABLE>
13
<PAGE> 14
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, continued
(7) Earnings Per Share
Earnings per share of common stock for the three-month and nine-month
periods ended June 30, 1997, have been determined by dividing net income
for the period by the weighted average number of shares of common stock
and common stock equivalents outstanding during the period. Book value
per share of common stock at June 30, 1997 and September 30, 1996 have
been determined by dividing total shareholders' equity by the number of
shares of common stock and common stock equivalents considered outstanding
at the respective dates. Stock options are regarded as common stock
equivalents and are, therefore, considered in per share calculations.
Common stock equivalents are computed using the treasury stock method.
Common shares outstanding have been reduced by the ESOP shares that have
not been committed to be released.
The computation of earnings per common share is as follows:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income for the period................ $8,609,000 $10,895,000 $2,476,000 $2,544,000
========== =========== ========== ==========
Common shares issued..................... 7,289,620 7,289,620 7,289,620 7,289,620
Net Treasury shares...................... 1,917,871 1,368,429 1,941,588 1,549,497
Unallocated ESOP shares.................. 326,321 368,274 314,472 356,317
---------- ----------- ---------- ----------
Weighted average common shares
outstanding during the period........... 5,045,428 5,552,917 5,033,560 5,383,806
Common stock equivalents based on the
treasury stock method................... 302,367 289,985 305,829 289,476
---------- ----------- ---------- ----------
Total weighted average common shares and
equivalents outstanding................. 5,347,795 5,842,902 5,339,389 5,673,282
========== =========== ========== ==========
Earnings per share....................... $1.61 $1.86 $0.46 $0.45
</TABLE>
The computation of book value per common share is as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1997 1996
-------------- ---------------
<S> <C> <C>
Common shares outstanding at the end
of the period.................................. 4,993,505 5,127,092
Incremental shares relating to dilutive stock
options outstanding at the end of the period... 369,614 286,766
-------------- ---------------
5,363,119 5,413,858
============= ===============
Total shareholders' equity at the end of
the period..................................... $ 129,114,000 $ 125,179,000
Book value per common share..................... $ 24.07 $ 23.12
</TABLE>
14
<PAGE> 15
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements, continued
(8) Acquisitions
In February 1997, the Company completed the acquisition of Kilbourn State
Bank for $25.3 million in cash. Under the terms of the agreement, the
Company acquired all of the outstanding shares of Kilbourn State Bank,
with Kilbourn subsequently merging into Bank Wisconsin, the Company's
commercial banking subsidiary. The acquisition was accounted for as a
purchase. The related accounts and results of operations are included in
the Company's consolidated financial statements from the date of
acquisition. The acquisition of Kilbourn State Bank added $93.0 million
to assets, including additions of $62.6 million to net loans and $67.8
million to deposits.
The excess of cost over the fair value of tangible assets acquired is
accounted for as goodwill and will be amortized over varying periods of
fifteen to twenty five years using the straight-line method. Goodwill of
this acquisition, net of accumulated amortization, totaled $8.9 million at
June 30, 1997.
(9) Changes in Accounting Policy
In February 1997, Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings per Share," which is effective for financial statements
issued for periods ending after December 15, 1997. This statement
simplifies the standards for computing earnings per share previously found
in APB No. 15. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic
EPS and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Earlier application of
this statement is not permitted. The Company has determined that the
impact of adoption will not have a material effect on the consolidated
financial statements of the Company.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997.
This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers.
15
<PAGE> 16
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings by the
Company with the Securities and Exchange Commission, in quarterly reports or
press releases or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, various
words or phrases are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include words and phrases such as "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," or similar expressions and various other statements indicated herein
with an asterisk after such statements. The Company wishes to caution readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and to advise readers that various factors could
affect the Company's financial performance and could cause actual results for
future periods to differ materially from those anticipated or projected. Such
factors include, but are not limited to: (i) general market rates, (ii) general
economic conditions, (iii) legislative/regulatory changes, (iv) monetary and
fiscal policies of the U.S. Treasury and Federal Reserve, (v) changes in the
quality or composition of the Company's loan and investment portfolios, (vi)
demand for loan products, (vii) deposit flows, (viii) competition, (ix) demand
for financial services in the Company's markets, and (x) changes in accounting
principles, policies or guidelines.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
The Company's total assets increased $240.8 million or 17.2% to $1.645 billion
at June 30, 1997 from $1.404 billion at September 30, 1996. Loans receivable,
including loans held for sale, increased $83.1 million. Mortgage-backed and
related securities, including mortgage-backed and related securities available
for sale, increased $97.1 million. Funding the increase in assets was an
increase in deposits of $176.9 million. At June 30, 1997, the Company's
statement of financial condition also includes the assets and liabilities of
Kilbourn State Bank since the acquisition was consummated on February 28, 1997.
The acquisition of Kilbourn State Bank added $93.0 million to total assets,
including additions of $62.6 million to net loans and $67.8 million to
deposits. The Company's ratio of shareholders' equity to total assets was
7.85% at June 30, 1997, compared to 8.92% at September 30, 1996. The Company's
book value per share was $24.07 at June 30, 1997, compared to $23.12 at
September 30, 1996.
Loans receivable, including mortgage loans held for sale, increased $83.1
million to $714.4 million at June 30, 1997 from $631.3 million at September 30,
1996, primarily due to $62.6 million of loans included in the Kilbourn
acquisition. The Company currently sells substantially all fixed rate single
family mortgage loans and retains adjustable-rate loans for its portfolio.
Additionally, the Company has increased its emphasis on consumer and interim
financing products, which are primarily retained in the Company's loan
portfolio. The loan originations were funded primarily by the increase in
deposits and are consistent with the Company's efforts to build earning assets.
For the nine months ended June 30, 1997, the Company originated approximately
$264.5 million in loans, as compared to $140.8 million for the same period in
the prior year. Of the $264.5 million in loans originated, $17.4 million were
in commercial loans, $106.3 million were in consumer and interim financing
loans and $140.8 million were in first mortgage loans. However, loan
repayments have partially offset the increases in loan originations.
16
<PAGE> 17
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis, continued
Mortgage-backed and related securities, including mortgage-backed and related
securities available for sale, increased $97.1 million to $685.3 million at
June 30, 1997 from $588.2 million at September 30, 1996. The increase was the
result of the Company purchasing adjustable rate mortgage-backed securities and
short- and medium-term REMIC securities. At June 30, 1997, private-issue
mortgage-backed securities, and all CMO's and REMIC's totaled $693.9 million
compared to $570.6 million at September 30, 1996. Private-issue MBS's
represent a significant portion of the Company's portfolio ($377.6 million at
June 30, 1997) due to the Company's view of the benefit of higher interest
rates generally available on private issue MBS's versus the additional credit
risk associated with such securities in comparison with agency MBS's. The
Company has been an active purchaser of adjustable rate mortgage-backed
securities as well as short-term mortgage-related securities because of the
lower level of interest rate risk and low credit risk in relation to the
interest earned on such securities. However, repayments and sales of existing
securities have partially offset the increases. An impairment loss of
$2,050,000 was recognized during the three months ended June 30, 1997 relating
to certain private issue mortgage-backed securities.
Deposits increased $176.9 million to $1.05 billion at June 30, 1997 from $877.7
million at September 30, 1996. The increase in deposits was primarily due to
an increase of $67.8 million from the Kilbourn State Bank acquisition as well
as increases of $67.6 million in money market demand account deposits and $46.3
million in certificates of deposit. However, slight decreases in other types
of deposit products have partially offset the increases. The Company has
continued to offer new deposit products in an effort to attract new deposits
and maintain current relationships with customers. Significant new deposit
products offered which have contributed to the increase include certificates of
deposit and a money market demand account with an interest rate tied to a
nationally recognized money market index. At June 30, 1997, the Company had
approximately $130.7 million in brokered certificates of deposit compared with
$138.6 million at September 30, 1996. The brokered deposits are generally of
terms from three months to ten years in maturity with interest rates that
approximate the Company's retail certificate rates. At June 30, 1997, $49.9
million of the brokered deposits having longer maturities are callable within
one to two years. Although the Company has experienced growth in its deposit
liabilities during the nine months ended June 30, 1997, there can be no
assurance that this trend will continue in the future, nor can there be any
assurance the Company will retain the deposits it now has.* The level of
deposit flows during any given period is heavily influenced by factors such as
the general level of interest rates as well as alternative yields that
investors may obtain on competing instruments, such as money market mutual
funds.
Advances and other borrowings increased by $66.8 million to $441.8 million at
June 30, 1997 from $375.0 million at September 30, 1996. The Company primarily
uses borrowed funds to fund purchases of mortgage-backed and related
securities. At June 30, 1997, the Company had a borrowing capacity available
of $143.3 million from the FHLB; however, additional securities may have to be
pledged as collateral.
At June 30, 1997, the Company had $113.0 million in interest rate swaps
outstanding compared with $55.0 million at September 30, 1996. The swaps are
designed to offset the changing interest payments of some of the Company's
borrowings and brokered certificates. Fixed pay-floating receive swaps totaled
$55.0 million at June 30, 1997 and were entered into to hedge interest rates on
borrowings from the FHLB used to fund purchases of fixed rate securities.
Fixed pay-floating receive swaps will provide for a lower interest expense (or
interest income) in a rising rate environment while adding to interest expense
in a falling rate environment. Fixed receive-floating pay swaps totaled $58.0
million at June 30, 1997 and were entered into to hedge interest rates on
brokered deposits used to fund the purchase of floating rate securities. Fixed
receive-floating pay swaps will provide for a lower interest expense (or
interest income) in a falling rate environment while adding to interest
17
<PAGE> 18
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis, continued
expense in a rising rate environment. During the nine months ended June 30,
1997, the Company recorded a net reduction of interest expense of $314,000 as
a result of the Company's interest rate swap agreements.
At June 30, 1997, the Company had $30.0 million in interest rate corridors
outstanding compared with zero at September 30, 1996. The Company uses
interest rate corridors to help protect its net interest margin in various
interest rate environments. $20.0 million of the interest rate corridors pay
the Company the range difference or a full 1.0% when the three-month Libor rate
is in the corridor strike rates. There are no payments due to the Company when
three-month Libor rates are outside of the corridor strike rates. $10.0
million of the interest rate corridors pay the Company the difference between
the three-month Libor and the low limit of the corridor strike rate up to the
full amount of the corridor strike rate. There are no payments due to the
Company when three-month Libor rates are below the corridor strike rate. When
rates are above the corridor strike rate, the corridor pays the Company the
full corridor range of 1.0%.
RESULTS OF OPERATIONS
NET INCOME. An impairment loss of $2,050,00 was recognized during the three
months ended June 30, 1997 to reflect a decline in fair value of certain
private issue mortgage-backed securities which was judged to be other than
temporary. The underlying loans, secured by single-family properties located
primarily in California, have experienced significant delinquencies and
foreclosures with recoveries less than previously realized. Consequently, the
various subordinate and cash positions within the mortgage-backed securities
may no longer protect the Company's position in the securities. The securities
were written down to a fair value at which the remaining anticipated cash flows
should provide a return at a market rate of interest on the remaining cost
basis. Net income for the nine months ended June 30, 1997 was $8.6 million
compared to $10.9 million for the nine months ended June 30, 1996. In addition
to the impairment loss, the decrease for the nine month period was the result
of a decrease in other operating income, which consisted primarily of a $2.2
million decrease in gains on the sale of mortgage-backed and related
securities, coupled with a $4.5 million increase in general and administrative
expenses, partially offset by a $2.1 million decrease in income tax expense.
Net income for the three months ended June 30, 1997 was $2.5 million compared
to $2.5 million for the three months ended June 30, 1996. The decrease in
income for the three month period caused by the impairment loss was offset by a
$1.2 million increase in net interest income and a $1.9 million increase in
other operating income, which consisted primarily of a $412,000 increase in
gains on the sale of mortgage-backed and related securities, a $307,000
increase in gains on the sale of mortgage loans, as well as an increase of
$552,000 in income from affordable housing, partially offset by a $1.9 million
increase in general and administrative expenses.
The following table shows the return on average assets and return on average
equity ratios for each period:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
------- -------- ------- --------
<S> <C> <C> <C> <C>
Return on average assets (annualized). 0.78% 1.16% 0.64% 0.79%
Return on average equity (annualized). 9.05% 10.73% 7.76% 7.83%
</TABLE>
NET INTEREST INCOME. Net interest income before provision for loans losses
increased $2.0 million or 7.6% and $1.2 million or 13.8% for the nine and
three months ended June 30, 1997, respectively, compared to the same periods in
the prior year. The net interest margin was 2.77% and 3.01% for the nine
months ended June 30, 1997 and 1996, respectively, and 2.84% and 2.95% for the
three months ended June 30, 1997 and 1996, respectively.
18
<PAGE> 19
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis, continued
The decline in the net interest margin in both periods is due to decreasing
interest rate spreads that the Company has been experiencing in its asset and
liability base and a changing asset mix which includes a higher level of
non-interest earning assets. The Company increased its investment in
affordable housing units to $44.5 million at June 30, 1997 compared with $31.0
million at June 30, 1996. This investment strategy provides returns primarily
through income tax credits but is not an interest earning asset and thus has
the effect of decreasing the Company's net interest margin.
Total interest income increased $10.9 million or 16.1% to $78.8 million for the
nine months ended June 30, 1997, compared to $67.9 million for the nine months
ended June 30, 1996, and increased $5.0 million or 21.7% to $28.3 million for
the three months ended June 30, 1997, compared to $23.3 million for the three
months ended June 30, 1996. The increase in interest income was primarily the
result of increases in interest on loans and securities. The increase in
interest on loans was due to an increase in the average balance of loans to
$658.4 million from $539.5 million for the nine months ended June 30, 1997 and
1996, respectively, partially offset by decreases in the average yield on loans
to 8.52% from 8.62% for the same period in the prior year. The increase in net
interest income on loans for the three months ended June 30, 1997 compared with
the three months ended June 30, 1996 was the result of an increase in the
average balance of loans to $683.7 million from $559.7 million and an increase
in the average yield on loans to 8.82% from 8.59% for the same period in the
prior year. The decrease in the average yield for the nine months ended June
30, 1997 is primarily due to the Company now selling substantially all new
originations of initially higher yielding long-term, fixed-rate single-family
mortgage loans in the secondary market and retaining new originations of
initially lower yielding adjustable-rate single family mortgage loans. The
increase in the average balance of loans is due primarily to the Company's
recent efforts to emphasize commercial, consumer and home equity lending in
addition to the Kilbourn State Bank acquisition. The increase in interest
income on mortgage-backed and related securities was due to an increase in the
average balance of such securities to $607.6 million from $550.5 million for
the nine months ended June 30, 1997 and 1996, respectively, partially offset by
decreases in the average yield on such securities to 6.95% from 7.05% for the
same periods. The increase in net interest income on mortgage-backed and
related securities for the three months ended June 30, 1997 compared with the
three months ended June 30, 1996 was primarily the result of an increase in the
average balance of securities to $654.7 million from $581.1 million and an
increase in the average yield on such securities to 7.01% from 6.92% for the
same periods. The Company has been active during the past year repositioning
its available for sale mortgage-backed and related securities portfolio by
selling significant amounts of securities and replacing them with securities
with more favorable maturity positions and characteristics which reflect the
Company's overall asset/liability management strategies.
Total interest expense increased $8.9 million or 21.6% to $50.3 million for the
nine months ended June 30, 1997, compared to $41.3 million for the nine months
ended June 30, 1996. For the three months ended June 30, 1997, total interest
expense increased $3.8 million, or 26.7%, to $18.1 million compared to $14.2
million for the three months ended June 30, 1996. The increase in interest
expense was the result of increases in the average balances of deposits and
advances and other borrowings as well as an increase in the cost of deposits.
The average balances of deposits were $900.6 million and $953.8 million for the
nine and three months ended June 30, 1997, respectively, as compared to $737.6
million and $783.6 million for the same periods in the prior year. The
increases in the balances of deposits are due to the Company's offering of
additional deposit products, the use of brokers to sell certificates of deposit
and the Kilbourn State Bank acquisition. The average cost of deposits
increased to 5.07% and 5.21% for the nine and three months ended June 30, 1997,
respectively, from 4.96% and 4.93% for the same periods in the prior year. As
part of a continuing strategy, the Company continues to offer deposit products
that compete more effectively with money market funds and other non-financial
deposit products. Such accounts have generally changed the Company's
traditional mix of deposit accounts to one that is more adjustable to current
interest rates such as the money market demand account. This has resulted in
passbook and certificate of deposit accounts representing a lower percentage of
the Company's total deposit portfolio. The average balance of advances and
other borrowings were $394.7 million and $417.6 million for the
19
<PAGE> 20
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis, continued
nine and three months ended June 30, 1997, respectively, as compared to $337.6
million and $343.6 million for the same periods in the prior year. The average
cost of advances and other borrowings decreased to 5.45% from 5.51% for the
nine months ended June 30, 1997 and 1996, respectively, and increased slightly
to 5.43% from 5.42% for the three months ended June 30, 1997 and 1996,
respectively. The borrowings are primarily adjustable-rate FHLB advances which
have repriced to reflect the slight decrease in rate levels associated with the
respective borrowing rate indexes from the same period in the prior year.
The following table sets forth information regarding: (1) average assets and
liabilities, (2) average yield on assets and average cost on liabilities, (3)
net interest margin, (4) net interest rate spread, and (5) the ratio of earning
assets to interest-bearing liabilities for the nine- and three-month periods
ended June 30, 1997 and 1996, respectively.
20
<PAGE> 21
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
1997 1996
-----------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and overnight deposits....... $ 21,044 $ 872 5.54 % $ 19,730 $ 794 5.38 %
Trading account securities...................... 3,252 170 6.99 55 3 7.29
Debt and equity securities...................... 70,628 3,226 6.11 52,016 2,346 6.02
Mortgage-backed and related securities.......... 607,606 31,592 6.95 550,515 29,036 7.05
Loans:
First mortgage................................ 418,640 25,648 8.19 348,096 21,315 8.18
Home equity................................... 99,833 7,115 9.53 80,192 5,872 9.78
Consumer...................................... 102,120 7,147 9.36 93,014 6,351 9.12
Commercial and agricultural................... 37,838 2,035 7.19 18,168 1,258 9.25
-------------------- -------------------
Total loans................................ 658,431 41,945 8.52 539,470 34,796 8.62
Federal Home Loan Bank stock.................... 19,940 1,024 6.87 17,618 905 6.86
-------------------- -------------------
Total earning assets....................... 1,380,901 78,829 7.63 1,179,404 67,880 7.69
-------- -------
Valuation allowances............................ (7,755) (2,647)
Cash and due from banks......................... 20,920 13,967
Other assets.................................... 83,436 63,761
---------- ----------
Total assets............................... $1,477,502 $1,254,485
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts.................................. $ 47,791 602 1.68 $ 41,767 462 1.48
Money market demand accounts.................. 206,925 7,337 4.74 139,600 4,842 4.63
Passbook...................................... 84,699 1,857 2.93 85,266 1,814 2.84
Certificates of deposit....................... 561,219 24,353 5.80 470,918 20,269 5.75
-------------------- -------------------
Total interest-bearing deposits................. 900,634 34,149 5.07 737,551 27,387 4.96
Advances and other borrowings................... 394,703 16,084 5.45 337,552 13,922 5.51
Advances from borrowers for taxes and insurance. 5,239 21 0.54 5,480 25 0.61
-------------------- -------------------
Total interest-bearing liabilities......... 1,300,576 50,254 5.16 1,080,583 41,334 5.11
Non interest-bearing deposits................... 38,845 26,373
Other liabilities............................... 11,278 11,882
Shareholders' equity............................ 126,803 135,647
---------- ----------
Total liabilities and shareholders' equity...... $1,477,502 $1,254,485
========== ==========
Net interest income............................. $28,575 $26,546
======= =======
Net yield on interest-earning assets............ 2.77 3.01
Interest rate spread............................ 2.47 2.58
Ratio of earning assets to interest-bearing
liabilities..................................... 106.18 109.15
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
1997 1996
-----------------------------------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold and overnight deposits....... $ 13,930 $ 228 6.57 % $ 17,924 $ 230 5.16 %
Trading account securities...................... 2,696 47 6.99 - - -
Debt and equity securities...................... 73,858 1,213 6.59 51,745 779 6.05
Mortgage-backed and related securities.......... 654,676 11,444 7.01 581,065 10,001 6.92
Loans:
First mortgage................................ 421,958 8,893 8.45 357,998 7,380 8.29
Home equity................................... 108,449 2,665 9.86 80,266 1,908 9.56
Consumer...................................... 105,476 2,718 10.34 102,114 2,218 8.74
Commercial and agricultural................... 47,860 767 6.43 19,342 450 9.36
-------------------- ------------------
Total loans................................ 683,743 15,043 8.82 559,720 11,956 8.59
Federal Home Loan Bank stock.................... 20,504 329 6.44 17,746 287 6.50
-------------------- ------------------
Total earning assets....................... 1,449,407 28,304 7.83 1,228,200 23,253 7.61
-------- -------
Valuation allowances............................ (8,821) (5,565)
Cash and due from banks......................... 25,954 14,243
Other assets.................................... 88,510 65,691
---------- ----------
Total assets............................... $1,555,050 $1,302,569
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts.................................. $ 52,291 237 1.82 $ 42,665 147 1.39
Money market demand accounts.................. 227,541 2,802 4.94 155,420 1,747 4.52
Passbook...................................... 93,591 722 3.09 83,078 587 2.84
Certificates of deposit....................... 580,415 8,639 5.97 502,446 7,129 5.71
-------------------- ------------------
Total interest-bearing deposits................. 953,838 12,400 5.21 783,609 9,610 4.93
Advances and other borrowings................... 417,601 5,651 5.43 343,638 4,630 5.42
Advances from borrowers for taxes and insurance. 5,109 7 0.55 5,674 8 0.57
-------------------- ------------------
Total interest-bearing liabilities......... 1,376,548 18,058 5.26 1,132,921 14,248 5.05
Non interest-bearing deposits................... 45,385 27,865
Other liabilities............................... 5,492 11,100
Shareholders' equity............................ 127,625 130,683
---------- ----------
Total liabilities and shareholders' equity...... $1,555,050 $1,302,569
========== ==========
Net interest income............................. $10,246 $9,005
======= ======
Net yield on interest-earning assets............ 2.84 2.95
Interest rate spread............................ 2.57 2.56
Ratio of earning assets to interest-bearing
liabilities..................................... 105.29 108.41
</TABLE>
21
<PAGE> 22
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis, continued
PROVISION FOR LOAN LOSSES. The following table summarizes the allowance for
loan losses for each period:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------- -----------------------
1997 1996 1997 1996
----------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance...................... $ 5,217 $ 4,076 $ 6,122 $ 4,204
Provision for loan losses.............. 501 222 129 78
Recoveries............................. 77 28 3 22
Charge-offs............................ (1,695) (67) (476) (45)
Acquired bank's allowance.............. 1,678 - - -
----------- ----------- ---------- ----------
Ending balance......................... $ 5,778 $ 4,259 $ 5,778 $ 4,259
=========== =========== ========== ==========
Ratio of allowance for loan losses to
gross loans receivable at the end
of the period......................... 0.76% 0.70% 0.76% 0.70%
Ratio of allowance for loan losses to
total non-performing loans at the
end of the period..................... 236.32% 120.62% 236.32% 120.62%
Ratio of net charge-offs to average
gross loans (annualized).............. 0.33% 0.01% 0.20% 0.02%
</TABLE>
Management believes that the allowance for loan losses is adequate to provide
for potential losses as of June 30, 1997, based upon its current evaluation of
loan delinquencies, non-performing loans, charge-off trends, economic
conditions and other factors. The increase in the provision for loan losses in
the current quarter reflects the continued growth in the Company's loan
portfolio and also reflects the increasing amount of higher yielding, higher
risk loans in the Company's loan portfolio. Repossessed autos sold during the
nine and three months ended June 30, 1997 resulted in charge-offs of $1.5
million and $432,000, respectively. It is anticipated that as more loans
default and repossessed autos are sold, additional charge-offs will be incurred
(See "Asset Quality").* The Company believes that the allowance for loan
losses is adequate to provide for potential anticipated losses based upon
current known conditions.
OTHER OPERATING INCOME. Other operating income decreased by $2.5 million and
$133,000 for the nine and three months ended June 30, 1997, compared to the
same periods in the prior year. The following table shows the percentage of
other operating income to average assets for each period:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------- -----------------------
1997 1996 1997 1996
----------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Other operating income................. $ 6,446 $ 8,900 $ 1,139 $ 1,272
Percent of average assets (annualized). 0.58% 0.95% 0.29% 0.39%
</TABLE>
The primary cause of the decline in operating income for each period was the
Company's decision to recognize an impairment loss of $2,050,00 on certain
private issue mortgage-backed securities during the three months ended June 30,
1997 to reflect a decline in fair value which was judged to be other than
temporary. The underlying loans, secured by single-family properties located
primarily in California, have experienced
22
<PAGE> 23
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis, continued
significant delinquencies and foreclosures with recoveries less than previously
realized. Consequently, the various subordinate and cash positions within the
mortgage-backed securities may no longer protect the Company's position in the
securities. Therefore, in accordance with GAAP, the securities were written
down to a fair value at which the remaining anticipated cash flows should
provide a return at a market rate of interest on the remaining cost basis.
Other operating income decreased to $6.5 million for the nine months ended June
30, 1997 compared to $8.9 million for the same period in the prior year. In
addition to the impairment loss, the decrease was due primarily to decreases in
gains on investments and mortgage-backed and related securities, partially
offset by an increase in gains on trading account activity and income from the
Company's affordable housing subsidiary. Gains on investments and
mortgage-backed and related securities decreased to $1.0 million from $3.3
million for the nine months ended June 30, 1997 and 1996, respectively. The
gains recognized for the nine months ended June 30, 1996 were primarily due to
declining interest rates and the Company's repositioning of its existing
leverage portfolio. The Company sold securities from the leverage portfolio
and replaced them with similar securities with more favorable interest rate and
maturity characteristics. However, the Company does not consider gains on the
sales of securities as a predictable source of earnings as such sales are based
on the Company's ongoing review of the individual securities within the
Company's available for sale portfolio whereby securities may be sold and
replaced with ones that offer a better combination of interest income, interest
rate risk or credit risk than the security sold. Gain/(loss) on foreclosed
properties decreased to a loss of $1,000 from a gain of $867,000 for the nine
months ended June 30, 1997 and 1996, respectively. For the nine months ended
June 30, 1996, the gain was the result of the sale of one foreclosed property
which had a carrying value of $5.8 million. The gain on sale of this property
was $684,000. Gains from the trading account increased to $607,000 from
$109,000 for the nine months ended June 30, 1997 and 1996, respectively. The
increase in trading gains was the result of the sale of mortgage-backed
securities which the Company had exchanged for its own mortgage loans ("loan
swaps"). This method of selling the Company's salable mortgage production is
required, under accounting rules, to be accounted for as a "trading" activity,
and as such, the resulting realized and unrealized gains or losses are
classified as trading income. The level of trading gains may fluctuate due to
the volume of originations of single-family mortgage loans which in turn can
fluctuate due to changes in interest rates. Sales of loans for cash as opposed
to loan swaps are recorded as sales of mortgage loans in the income statement.
Income from the operations of the Company's affordable housing subsidiary
(which represents primarily rental income) increased to $2.4 million from $1.3
million for the nine months ended June 30, 1997 and 1996, respectively. The
Company currently has twenty properties fully in operation compared to twelve
in the prior year.
Other operating income decreased to $1.1 million for the three months ended
June 30, 1997 compared to $1.3 million for the three months ended June 30,
1996. The decrease due to the impairment loss was offset primarily by increases
in gains on investments and mortgage-backed and related securities, increases
in gains on sales of mortgage loans and income from the Company's affordable
housing subsidiary. Gains on investments and mortgage-backed and related
securities increased to a gain of $411,000 from a loss of $1,000 for the three
months ended June 30, 1997 and 1996, respectively. The increase in gains is
due to an increased level of activity. As stated in the previous paragraph,
gains are subject to a number of factors and are not a consistent source of
earnings. Gains on the sale of mortgage loans increased to $464,000 from
$157,000 for the three months ended June 30, 1997 and 1996, respectively. The
Company's volume of mortgage loan sales was $27.1 million for the three months
ended June 30, 1997 compared to $19.4 million for the three months ended June
30, 1996. The increase in gains is also attributable to an increase in the
amount of securitizations during the quarter ended June 30, 1997. Income from
the operations of the Company's affordable housing subsidiary (which represents
primarily rental income) increased to $964,000 from $412,000 for the three
months ended June 30, 1997 and 1996, respectively.
23
<PAGE> 24
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis, continued
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $4.5 million or 22.6% and $1.9 million or 26.8% for the nine and
three months ended June 30, 1997, compared to the same periods in the prior
year. The following table shows the percentage of general and administrative
expenses to average assets for each period:
<TABLE>
<CAPTION>
Nine months ended Three months ended
June 30, June 30,
------------------------- -----------------------
1997 1996 1997 1996
----------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
General and administrative expenses.... $ 24,589 $ 20,061 $ 8,840 $ 6,972
Percent of average assets (annualized). 2.23% 2.14% 2.28% 2.15%
</TABLE>
The increases were due primarily to increased levels of compensation and other
costs associated with the Kilbourn State Bank acquisition, the opening of four
new branches and a centralized call center, and other increased activity
connected with the Company's higher level of earning assets. In addition, the
affordable housing subsidiary showed increases in operating expenses of $1.3
million and $581,000 for the nine and three months ended June 30, 1997, as
compared to the same periods in the prior year, primarily as a result of the
Company currently having twenty properties fully in operation compared to
twelve in the prior year.
INCOME TAX EXPENSE. Income tax expense decreased to $1.3 million from $4.3
million for the nine months ended June 30, 1997 and 1996, respectively. Income
tax expense decreased to ($60,000) from $683,000 for the three months ended
June 30, 1997 and 1996, respectively. The effective tax rate for the nine and
three months ended June 30, 1997 was 13.31% and (2.5%), respectively compared
with 28.15% and 21.17% for the nine and three months ended June 30, 1996. The
decrease in effective rates reflects the effect of the tax credits earned by
the Company's affordable housing subsidiary. Income tax credits increased to
$2.1 million and $730,000 for the nine and three months ended June 30, 1997,
compared to $1.2 million and $426,000 for the same periods in the prior year.
ASSET QUALITY
Total non-performing assets were $2.6 million or 0.16% of total assets at June
30, 1997, compared to $4.0 million or 0.28% of total assets at September 30,
1996. Non-performing assets include loans which have been placed on nonaccrual
status and property upon which a judgment of foreclosure has been entered but
prior to the foreclosure sale, as well as property acquired as a result of
foreclosure.
Non-performing assets as of June 30, 1997 included $1.8 million of purchased
auto loans which are past due or in default. These auto loans were purchased
in 1995 and 1996 under a warehouse financing arrangement the Company had with
the originator of the sub-prime automobile loans. The intent of the financing
was to warehouse the loans until the originator could originate sufficient
quantities to securitize the loans and sell to institutional investors. At
that time, the loans would be sold back to the originator. The loans were
serviced by an independent third party servicer and the loans had various
levels of insurance and in addition were guaranteed as to principal and
interest payments by the originator of the loans. The maximum amount that the
Company had outstanding at any point in time was a balance of $14.6 million
during February, 1996. The Company has not funded any loans since that time
and as of June 30, 1997, the balance of the sub-prime auto loans was $1.8
million compared to $7.7 million at September 30, 1996. The decrease in the
loan balance since September 30, 1996 is due to cash payments received of $4.4
million and charge-offs of $1.5 million. Of the $4.4 million of cash payments
received, $2.7 million were loans which were sold back to the originator for
face value plus a gain
24
<PAGE> 25
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis, continued
of $50,000 which was treated as a recovery. Actions have been taken to
repossess the collateral on the delinquent loans and to enforce the guarantee
of the originator of these loans. During the quarter ended June 30, 1997, the
Company entered into an agreement with the originator under which the
originator has agreed to pay the Company $1.5 million over a twelve month
period beginning May 31, 1997, in exchange for forgiveness of all claims the
Company may have against the originator. The money received from the
originator will first be used to reduce the balance of outstanding purchased
auto loans, and if there is any excess, the amount received will then be
recorded as recoveries to the allowance for loan losses. Repossessed autos
sold during the nine and three months ended June 30, 1997 resulted in
charge-offs of $1.5 million and $432,000. It is anticipated that as more loans
default and the repossessed autos are sold, additional charge-offs will be
incurred.*
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1997 1996
---------- -------------
(Dollars in thousands)
<S> <C> <C>
Non-performing loans.................. $ 2,445 $ 3,890
Foreclosed properties................. 188 80
---------- -------------
Non-performing assets................. $ 2,633 $ 3,970
========== =============
Non-performing loans to gross loans... 0.32% 0.58%
Non-performing assets to gross assets. 0.16% 0.28%
</TABLE>
There are no material loans about which management is aware that there exists
serious doubts as to the ability of the borrower to comply with the loan terms,
except as disclosed above.
Impaired loans totaled $1.8 million at June 30, 1997 compared to $3.6 million
at September 30, 1996. These loans had associated impairment reserves of
$1.1 million at June 30, 1997 and September 30, 1996, respectively. The
average balance of impaired loans was $3.1 million and $1.4 million at June 30,
1997 and September 30, 1996, respectively. No interest income was recorded in
either reporting period.
25
<PAGE> 26
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis, continued
ASSET/LIABILITY MANAGEMENT
Asset and liability management is an ongoing process of managing asset and
liability maturities to control the interest rate risk of the Company.
Management controls this risk through pricing of assets and liabilities and
maintaining specific levels of maturities. In recent periods, management's
strategy has been to (1) sell substantially all new originations of long-term,
fixed-rate, single-family mortgage loans in the secondary market, (2) invest in
various adjustable-rate and short-term mortgage-backed and related securities,
(3) invest in adjustable-rate, single-family mortgage loans, and (4) increase
its investments in consumer and commercial loans with generally shorter
interest rate characteristics. Although management believes that its
asset/liability management strategies have reduced the potential effects of
changes in interest rates on its operations, increases in interest rates may
adversely affect the Company's results of operations because interest-bearing
liabilities will reprice more quickly than interest-earning assets.
At June 30, 1997, the Company's estimated cumulative one-year gap between
assets and liabilities was a negative 10.68% of total assets. A negative gap
occurs when a greater dollar amount of interest-bearing liabilities are
repricing or maturing than interest earning assets. The Company's three-year
cumulative gap as of June 30, 1997 was a negative 5.17% of total assets. With
a negative gap position, during periods of rising interest rates it is expected
that the cost of the Company's interest-bearing liabilities will rise more
quickly than the yield on its interest-earning assets, which will have a
negative effect on its net interest income.* Although the opposite effect on
net interest income would occur in periods of falling interest rates, the
Company could experience substantial prepayments of its fixed-rate mortgage
loans and mortgage-backed and related securities in periods of falling interest
rates, which would result in the reinvestment of such proceeds at market rates
which are lower than current rates.*
26
<PAGE> 27
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis, continued
The following table summarizes the Company's gap position as of June 30, 1997.
<TABLE>
<CAPTION>
More than More than
Within Four to One Year Three
Three Twelve to Three Years to Over Five
Months Months Years Five Years Years Total
-----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS: (1)
Loans: (2)
Fixed.................................. $ 21,520 $ 33,036 $ 52,931 $ 21,174 $ 68,321 $ 196,982
Variable............................... 76,009 48,167 110,668 46,440 8,475 289,759
Consumer loans (2)....................... 115,094 39,865 22,474 16,908 16,187 210,528
Mortgage-backed and related securities... 1,311 3,935 25,708 19,663 16,724 67,341
Assets available for sale:
Mortgage loans......................... 17,080 - - - - 17,080
Fixed rate mortgage related............ 8,264 22,630 31,905 23,328 14,331 100,458
Variable rate mortgage related......... 348,487 168,980 - - - 517,467
Other.................................. 34,010 15,297 21,725 372 431 71,835
Trading account securities............... - - - - - -
Investment securities and other assets... 45,005 2,002 1,025 - 1,636 49,668
----------------------------------------------------------------------------
Total.................................. $ 666,780 $ 333,912 $ 266,436 $ 127,885 $ 126,105 $ 1,521,118
============================================================================
INTEREST-BEARING LIABILITIES:
Deposits: (3)
NOW accounts........................... $ 4,956 $ 14,867 $ 20,355 $ 8,079 $ 5,317 $ 53,574
Passbook savings accounts.............. 4,250 12,783 25,872 17,823 39,467 100,195
Money market deposit accounts.......... 56,679 170,040 11,088 2,772 924 241,503
Certificates of deposit................ 284,557 196,061 58,351 72,037 - 611,006
Borrowings............................... 430,369 - 5,012 44 - 435,425
Impact of interest rate swap (4)......... 3,000 - 55,000 (23,000) (35,000) -
-----------------------------------------------------------------------------
Total.................................. $ 783,811 $ 393,751 $ 175,678 $ 77,755 $ 10,708 $ 1,441,703
============================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities. $ (117,031) $ (59,839) $ 90,758 $ 50,130 $ 115,397 $ 79,415
============================================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities...................... (117,031) (176,870) (86,112) (35,982) 79,415
==============================================================
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities as a percent of total
assets................................... (7.11%) (10.75%) (5.23%) (2.19%) 4.83%
===============================================================
</TABLE>
- ------------------------------------------------------------------------------
(1) Adjustable and floating rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in
each case adjusted to take into account estimated prepayments utilizing
the Company's historical prepayment statistics, modified for forecasted
statistics using the Public Securities Association model of prepayments.*
For fixed rate mortgage loans and mortgage-backed and related securities,
annual prepayment rates ranging from 8% to 30%, based on the loan coupon
rate, were used.
(2) Balances have been reduced for undisbursed loan proceeds, unearned
insurance premiums, deferred loan fees, purchased loan discounts and
allowances for loan losses, which aggregated $41.4 million at June 30,
1997.
(3) Although the Company's negotiable order of withdrawal ("NOW") accounts,
passbook savings accounts and money market deposit accounts generally are
subject to immediate withdrawal, management considers a certain portion of
such accounts to be core deposits having significantly longer effective
maturities based on the Company's retention of such deposits in changing
interest rate environments. NOW accounts, passbook savings accounts and
money market deposit accounts are assumed to be withdrawn at annual rates
of 37%, 17% and 88%, respectively, of the declining balance of such
accounts during the period shown. The withdrawal rates used are higher
than the Company's historical rates but are considered by management to be
more indicative of expected withdrawal rates in a rising interest rate
environment. If all the Company's NOW accounts, passbook savings accounts
and money market deposit accounts had been assumed to be repricing within
one year, the one-year cumulative deficiency of interest-earning assets to
interest-bearing liabilities would have been $307.5 million or 18.7% of
total assets.
(4) Adjustable and floating rate borrowings are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they are due.
27
<PAGE> 28
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis, continued
Assumptions regarding the withdrawal and prepayment are based on historical
experience, and management believes such assumptions reasonable, although the
actual withdrawal and repayment of assets and liabilities may vary
substantially.* Certain shortcomings are inherent in the method of analysis
presented in the gap table. For example, although certain assets and
liabilities may have similar maturities to repricing, they may react in
different degrees to changes in market interest rates.* Also, the interest
rates on other types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates.* Additionally, certain assets, such as
adjustable-rate loans and mortgage-backed and related securities, have features
which restrict changes in interest rates on a short-term basis and over the
life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the data in the table.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents, which include
investments in highly-liquid, short-term investments. The level of these
assets is dependent on the Company's operating, financing and investing
activities during any given period. Cash and cash equivalents totaled $45.0
million and $22.5 million as of June 30, 1997 and September 30, 1996,
respectively.
The Company's primary sources of funds are deposits, including brokered
certificates, borrowings from the FHLB and proceeds from principal and interest
payments on loans and mortgage-backed and related securities. Although
maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows, prepayments on mortgage loans and mortgage-backed and
related securities are influenced significantly by general interest rates,
economic conditions and competition. Additionally, the Bank is limited by the
FHLB to borrowing up to 35% of its assets. At June 30, 1997, the Company had a
borrowing capacity available of $143.3 million from the FHLB; however,
additional securities may have to be pledged as collateral.
Under federal and state laws and regulations, the Company and its wholly-owned
subsidiaries are required to meet certain tangible, core and risk-based capital
requirements. Tangible capital generally consists of shareholders' equity
minus certain intangible assets. Core capital generally consists of tangible
capital plus qualifying intangible assets. The risk-based capital requirements
presently address credit risk related to both recorded and off-balance sheet
commitments and obligations.
Bank Wisconsin is required to follow FDIC capital adequacy guidelines which
prescribe minimum levels of capital and require that institutions meet certain
risk-based and leverage capital requirements. Under the FDIC capital
regulations, Bank Wisconsin is required to meet the following capital
standards: (i) "Tier 1 capital" in an amount not less than 3% of total assets;
(ii) "Tier 1 capital" in an amount not less than 4% of risk-weighted assets;
and (iii) "total capital" in an amount not less than 8% of risk-weighted
assets.
The following table summarizes Bank Wisconsin's capital ratios at the dates
indicated:
<TABLE>
<CAPTION>
June 30, 1997 September 30, 1996
----------------- ---------------------
Capital Capital
----------------- ---------------------
Capital Standard Amount Percent Amount Percent
- -------------------------------- ------- -------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tier 1 capital/average assets 24,867 11.77% 8,789 9.12%
Tier 1 capital/risk-based 24,867 16.43% 8,789 12.38%
Total capital/risk-based 26,765 17.68% 9,478 13.35%
</TABLE>
28
<PAGE> 29
ST. FRANCIS CAPITAL CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis, continued
The changes in the capital amounts from September 30, 1996 to June 30, 1997 are
primarily due to the aforementioned Kilbourn State Bank acquisition.
The Bank is required to follow OTS capital regulations which require savings
institutions to meet three capital standards: (i) "tangible capital" in an
amount not less than 1.5% of adjusted total assets; (ii) "core capital" in an
amount not less than 3% of adjusted total assets; and (iii) "risk-based
capital" of at least 8% of risk-weighted assets. Savings institutions must
meet all of the standards in order to comply with the capital requirements.
The following table summarizes the Bank's capital ratios at the dates
indicated:
<TABLE>
<CAPTION>
June 30, 1997 September 30, 1996
----------------- ---------------------
Capital Capital
----------------- ---------------------
Capital Standard Amount Percent Amount Percent
- -------------------------------- ------- -------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible capital 92,953 6.53% 89,092 6.86%
Core capital 92,953 6.53% 89,092 6.86%
Risk-based capital 95,619 11.61% 92,764 13.12%
</TABLE>
As evidenced by the foregoing, the capital of each of the Company's financial
institution subsidiaries exceeded all capital requirements as mandated by the
requirements of the FDIC and OTS.
29
<PAGE> 30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Registrant nor the Bank is involved in any pending legal
proceedings involving amounts in the aggregate which management
believes are material to the financial condition and results of
operations of the Registrant and the Bank.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On July 25, 1997, the Company announced the declaration of a dividend
of $0.12 per share on the Company's common stock for the quarter ended
June 30, 1997. The dividend is payable on August 22,1997 to
shareholders of record as of August 11, 1997. This will be the eighth
cash dividend payment since the Company became a publicly-held company
in June 1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1 Statement Regarding Computation of Earnings Per Share (See
Footnote 7 in "Notes to Unaudited Consolidated Financial
Statements")
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report was filed.
30
<PAGE> 31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. FRANCIS CAPITAL CORPORATION
Dated: December 5, 1997 By: /s/ Thomas R. Perz
----------------------- -----------------------------------------
Thomas R. Perz
President and Chief Executive Officer
Dated: December 5, 1997 By: /s/ Jon D. Sorenson
----------------------- -----------------------------------------
Jon D. Sorenson
Chief Financial Officer
31
<PAGE> 32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ST. FRANCIS CAPITAL CORPORATION
Dated: By:
---------------------------- -----------------------------
Thomas R. Perz
President and Chief Executive Officer
Dated: By:
---------------------------- -----------------------------
Jon D. Sorenson
Chief Financial Officer
32
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JUNE 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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